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Some Tax Accounting Flexibility Is Here to Stay, Some Isn’t

Posted on Jan. 28, 2021

The IRS has signaled that it likes the electronic submission procedures instituted in response to the COVID-19 pandemic and plans to keep them, but that recent guidance flexibility for bonus depreciation might not be repeated.

It may be curious for the annual update on letter ruling request procedures (Rev. Proc. 2021-1, 2021-1 IRB 1) to call the IRS’s acceptance of electronically submitted requests and faxed Forms 3115, “Application for Change in Accounting Method,” permanent, but it reflects that the agency is pleased with the results, according to John Moriarty, IRS associate chief counsel (income tax and accounting).

In response to restrictions imposed by the pandemic, the IRS created several electronic submission options, including secured emailing of ruling requests and faxing submissions of Form 3115 duplicate copies (the original is attached to the taxpayer’s return).

Speaking January 27 at an American Bar Association Section of Taxation virtual meeting, Moriarty said the IRS plans to keep those electronic submission procedures in place after the pandemic ends, noting that the use of the word “permanent” is meant to pass that message along to taxpayers and practitioners. “Obviously, if something changes and we find an even better way to handle submissions, things could change in [Rev. Proc.] 2022-1,” he said.

Andrew Eisinger of Crowe LLP said taxpayers and practitioners have also appreciated the electronic submission procedures. 

Not So Fast There

Jane Rohrs of Deloitte Tax LLP asked if the flexibility the IRS granted taxpayers in Rev. Proc. 2020-50, 2020-48 IRB 1122, could be a sign of future approaches to procedural guidance for bonus depreciation and other tax accounting issues.

Released November 6, 2020, Rev. Proc. 2020-50 allows taxpayers three options for combining two batches of bonus depreciation final regulations issued in 2019 (T.D. 9874) and 2020 (T.D. 9916) and a 2019 set of proposed regs (REG-106808-19). The revenue procedure allows taxpayers to apply the rules retroactively as far back as the Tax Cuts and Jobs Act’s effective date for bonus depreciation.

Taxpayers also have the choice of applying the regs via an accounting method change or amended returns (administrative adjustment requests for partnerships), and the revenue procedure allows taxpayers to reverse their decisions on depreciation-related elections.

The wide variety of choices comes from language in the various effective date provisions calling for retroactive application, according to Kathleen Reed, branch 7 chief, IRS Office of Associate Chief Counsel (Income Tax and Accounting).

Reed noted that Rev. Proc. 2020-50 didn’t remove the qualified improvement property options from Rev. Proc. 2020-25, 2020-19 IRB 785, because the later guidance merely modified, rather than superseded, the earlier rules.

However, taxpayers and practitioners shouldn’t look for the same types of flexibility in future procedural guidance, Reed said. The retroactivity rules specific to the TCJA and the Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136) made Rev. Proc. 2020-50’s flexibility possible, she said.

Even future bonus depreciation guidance might not be so flexible, so this instance shouldn’t be broadly read or seen as part of a pattern, according to Reed.

Hit the Floor

Eisinger asked about the apparent contradiction between the IRS’s determination that the section 163(j) interest limitation isn’t a method of accounting in T.D. 9905 and Rev. Proc. 2020-50’s call to make some adjustments related to floor plan financing interest via section 481(a) adjustments.

Section 163(j)’s interest limitation allows for several trade-offs that relieve the taxpayer of its restriction in exchange for relinquishing entitlement to bonus depreciation. One trade-off removes the limit for floor plan financing interest, and the government determined that the exchange occurs only if the taxpayer has to use the floor plan financing exception to exceed the normal section 163(j) cap.

Taxpayers wanted the IRS to make the floor plan financing trade-off elective, but Elizabeth Binder, branch 7 attorney, IRS Office of Associate Chief Counsel (Income Tax and Accounting), noted that the statutory language didn’t support that interpretation.

Rev. Proc. 2020-50 tells taxpayers that followed the suggestion by the Joint Committee on Taxation that the floor plan financing trade-off is elective that they must include the section 163(j) limitation in their section 481(a) adjustments when moving from an impermissible to a permissible accounting method.

Binder said the floor plan financing trade-off is intertwined with the options allowed under Rev. Proc. 2020-50, so the use of section 481(a) adjustments to account for the section 163(j) changes was for administrative convenience.

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